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This Warren Buffett Stock Is Dirt Cheap Right Now

A lesser-known Buffett bank stock is growing rapidly while trading at a rock-bottom valuation.

Warren Buffett has amassed a large portfolio of bank stocks for Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) with major holdings in Bank of America(NYSE:BAC), Wells Fargo(NYSE:WFC), and American Express(NYSE:AXP), just to name a few of the most well-known and largest investments.

However, one lesser-known Buffett bank stock, Synchrony Financial(NYSE:SYF), could be the most compelling value of all. Synchrony is a major issuer of store-branded credit cards and also operates a rapidly growing online banking platform. After it dramatically underperformed the banking sector thanks to the loss of a key relationship, now could be the time to put this dirt-cheap Buffett bank stock on your radar.

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Strong earnings growth, and it's not just from tax reform

Synchrony Financial posted third-quarter earnings of $0.91 per share, which was not only well ahead of expectations but represented 30% year-over-year EPS growth. Sure, tax reform has a lot to do with this, but with 8.5% annual revenue growth, it's fair to say that Synchrony's business is growing nicely.

Just to run through a few of the growth metrics, Synchrony's net interest income was 9% greater than a year ago, and the purchase volume on its credit cards increased 11%.

Synchrony's online banking platform is perhaps the most impressive part of the quarter, with $8 billion of deposit growth in the company's high-yield savings accounts and CDs -- a 14% year-over-year growth rate.

A highly profitable business model

The store credit card business can be a rather profitable one. Although store credit cards tend to have higher default rates than standard credit cards, their higher interest rates more than make up for the difference. In fact, Synchrony's net interest margin for the quarter was 16.4% -- well in excess of that of most traditional credit card issuers.

And because of its branchless banking model and generally efficient operations, Synchrony delivers some of the best profitability metrics in the sector. The bank's return on assets (ROA) of 2.7% and return on equity (ROE) of 18.5% are both much greater than the respective 1% and 10% financial industry benchmarks, and its 31% efficiency ratio would make most other banks jealous.

Finally, while credit quality has become more of a concern recently with rising consumer debt levels, Synchrony's latest numbers don't give investors much cause for concern. Net charge-offs ticked up, but by only two percentage points. And the 30-plus-day delinquency rate is actually 21 basis points lower than it was in the third quarter of 2017.

A bargain after losing a key partnership

Synchrony Financial has been one of the worst-performing stocks in the financial sector in 2018 thus far, having underperformed the overall sector by more than 16 percentage points. The biggest reason for the poor performance is the loss of the company's valuable store card partnership with Walmart(NYSE:WMT), which is now set to expire in mid-2019.

And to be clear, this is a big deal for Synchrony. Of the company's $60.6 billion in retail credit card loan receivables, Synchrony estimates that $10 billion is from Walmart.

Shortly after the Walmart partnership termination was announced, Synchrony said that it should be able to fully replace the EPS impact. While this is certainly easier said than done, the company's third-quarter results lead me to believe that the recovery won't take too long at all. Plus, Synchrony is doing an excellent job of taking advantage of the stock's depressed valuation, having bought back $966 million (more than 4% of the total) in stock during the third quarter alone.

At a valuation of less than nine times 2018's expected earnings, Synchrony looks like a good bargain, especially after its latest results.

Author

Matt is a Certified Financial Planner based in South Carolina who has been writing for The Motley Fool since 2012. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!
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